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Chile: A Power Shuffle Over Tight Money

July 14, 1996

Business Outlook: CHILE

CHILE: A POWER SHUFFLE OVER TIGHT MONEY

The sudden resignation of Roberto Zahler, the central bank president, has reignited talk that Chile will ease restrictions on short-term capital inflows. But that move could worsen the inflation outlook.

Zahler's hard line on interest rates conflicted with the government, which was less concerned with fighting inflation than maintaining Chile's roaring growth rate. The index of economic activity--the so-called IMACEC--showed the economy grew by 10.2% in April from a year ago (chart). Chile's real gross domestic product was already up 9% in the year ended in the first quarter. The spurt seems unsustainable, though, given capacity constraints--unemployment was just 6.1% in March--and the central bank's tight monetary policy. Private economists expect real GDP to grow 7.2% for the year, down from 9.6% in 1995.

Trade will slow growth. Exports are flat so far in 1996 and will take a hit from falling copper prices, following the Sumitomo Corp. scandal. Copper accounts for about 40% of Chile's export revenue. Also, imports jumped 22.8% through April. Strong domestic demand means that imports will climb higher. Chile's 1995 trade surplus will slide into deficit this year.

The June 25 announcement that Chile will enter the Mercosur trade pact, which includes Brazil, Argentina, Paraguay, and Uruguay, on Oct. 1 will help exports begin adding solidly to Chile's growth again. The membership also offers some ammunition against inflation. That's because tariffs on goods from other members--17.4% of Chile's imports--will be cut by 40% and gradually eliminated over the next eight years. Cheaper imports will offset some domestic price increases. The central bank has set an inflation target of 6.5% this year, but in May, inflation was running at 8.6%, up from 8.2% in 1995.

After Zahler's resignation, the central bank said that growth will not prevent inflation from hitting its target. But any easing of capital restrictions now will pump up Chile's financial markets and economy as well as inflation later on.BY JAMES C. COOPER & KATHLEEN MADIGANReturn to top